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Monday, September 19, 2005

Housing Bubble Trouble? Not if There’s No Bubble

Chris Mayer of Columbia Business School and Todd Sinai of Wharton argue there is no housing bubble, though a few of the 46 markets they study look a bit frothy. Jim Hamilton comes to a similar conclusion (see here, here, and here):

Bubble Trouble? Not Likely, by Chris Mayer and Todd Sinai, WSJ Commentary: For the past several years, Chicken Littles have squawked that the sky -- or the ceiling -- is about to fall on the housing market... Yet basic economic logic suggests that this apparent ... bubble is anything but. Even in the highest-price cities, housing is, at most, slightly more expensive than average. Here's why: ... The annual cost of owning, not the price of the house itself, is what homebuyers should (and do) consider when contemplating a purchase. And when comparing the cost of owning with annual rent … annual cost is the right measure to use. That cost is simply the net cash outflow required to own a house for a year... We ... computed annual housing costs for 46 housing markets from 1980 to 2004 in a study due to be published this fall in the Journal of Economic Perspectives. Our findings are striking. In none of the hottest housing markets did the ratio of the cost of owning to rent in 2004 exceed the average over the sample period in their own market by more than 13%... the ratios in the other oft-cited "bubble" cities such as Boston, L.A., New York and San Francisco were no more than 3% above their long-run averages. A similar pattern arises when we compare a city's cost of housing to its mean family income. By contrast, in the late '80s, immediately prior to the large house-price declines of the early '90s, the ratio of the annual cost of owning to rent peaked 52% above the long-run average in San Francisco and New York. Boston and L.A. topped out, respectively, at 37% and 42% above the long-run average. ... Portland and Miami, and to a degree San Diego, are cities where we have a nascent concern...

The number one reason the current cost of owning differs so much from the price of a house is the historically low level of real, long-term interest rates. ... At a lower cost-per-dollar of housing, families are willing to spend more for a house, bidding up prices. ... We obviously don't think the sky's the limit for house prices. But when you combine the annual cost concept with recent growth in rents and incomes, today's pricing looks justifiable in most of the U.S. Despite all the talk of a bubble, we find little evidence that house prices are being bid up based on unreasonable expectations of future price growth. ... Of course, the same logic that says today's market price of housing is reasonable also implies that house prices are especially sensitive to real, long-term interest rates. In the absence of an offsetting increase in housing demand, an unanticipated rise in real mortgage rates could cause appreciable declines in house prices. For this reason we don't think speculation is justified in the housing market -- gambling on above-average capital gains is simply an interest-rate bet.

I need to get my hands on this paper because I must be missing something. This is not their only or their primary argument, but I don’t see why renting is the right opportunity cost to use to measure to cost of housing. For example, suppose that the owning to renting ratio is $1200/$1000, or 1.2.  Now let both prices double but all other prices remain the same. Then the ratio is $2400/$2000 and the relative price is still 1.2 – housing is no more expensive in terms of renting. But, in terms of, say, food and clothing, housing in general (i.e. owning or renting) is a lot more expensive. I also don't see why, at least theoretically, speculation can't cause both prices to rise in proportion during a bubble.  However, the other measure they use, the cost of owning relative to income, does not have this problem and it shows a similar trend to that reported for the owning to renting ratio.  And their conclusions regarding the real interest rate agree, as noted above, with other analysts who note the sensititvity of prices to interest rates.

    Posted by on Monday, September 19, 2005 at 12:27 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (14) 

    Sunday, September 18, 2005

    Fed Watch: What Will Be the Fed’s Message?

    Here's Tim Duy with a Fed Watch in anticipation of Tuesday's FOMC meeting:

    The Fed looks set to hike rates on Tuesday, with the markets pricing in at least an 86% probability of another 25bp pop. More interesting (assuming no surprises) will be the statement. The Fed will be walking a fine line on this one so as not to seem indifferent to those suffering from Katrina. In the end, I believe they will acknowledge but downplay Katrina’s impact while maintaining expectations of additional rate hikes. I think inflation fears will trump slowdown concerns at this next FOMC outing.

    Friday, we learned that images of Katrina’s devastation and higher gas prices likely conspired to depress the confidence numbers. I will turn to that topic later. What I think is most important for policy is the sharp rise in inflation expectations, from 3.1% to 4.6%. And this comes right after two regional manufacturing indexes that both experienced sharp rises in the prices paid component. So now you have the combination of inflation pressures in the system AND an expectation of sharply higher prices among economic agents. Simply put, this is a conservative central banker’s worst nightmare.

    Here is how I believe the Fed sees the story prior to Katrina: Despite rising energy prices, the impact on core-inflation has been muted (see also James Hamilton here), although at the higher end of their comfort range. The fundamental reason core-inflation is in check is because the Fed has withdrawn monetary accommodation in an effort to hold expectations at bay. Yes, I know that this makes the Fed sound like they think they are all powerful, but, well…you know.

    Now, after Katrina, inflation expectations may have come unglued. Furthermore, consider this: Assuming the survey accurately represents inflation expectations, prior to Katrina, the real fed funds rate was 0.4%. After Katrina, the real rate is now negative 1.1%. In other words, policy just became a lot more accommodative, and the neutral point shifted up more than 100 bp! That is nothing short of a big leap, and whether it is temporary or not remains to be seen (gasoline prices have headed lower, but higher home heating costs are expected this winter). I think that the Fed will want to make sure this is a temporary inflation expectations reading, and that means higher rates. David Altig notes that the previous outlier in inflation expectations was a short-lived but sharp drop following 9/11. It is worth remembering that the Fed followed the attacks with aggressive rate cutting. Wouldn’t the appropriate strategy now be the opposite?

    As for the rest of last week’s numbers, by and large I think they will leave the Fed with the feeling that inflation pressures are a threat; manufacturing may have slowed a bit but will soon expand under the duel influence of reconstruction and low inventories; and jobless claims have risen as expected, but this is largely a temporary and regional issue. I know this may sound “cold,” but the Fed does not make policy for specific regions or industries. They make policy for the nation as a whole.

    But what about consumer confidence? The UMich Index saw a dizzying slide in September (WSJ subscription only) from 89.1 to 76. The question, however, is to what degree Katrina and gasoline impact consumers’ willingness to spend. This is different from the ability to spend. Consumers may be unhappy because the basket of goods they can purchase has shrunk (or is increasing more slowly), but that doesn’t mean they stop spending. Indeed, non-auto retail sales gained 1% in August – an annualized rate of over 12%! Even if a big chunk of that gain was gasoline, the will to spend remains intact.

    A more concerning event would be for consumers to be scared into abruptly raising their savings rate. So far, we have seen little evidence that households want to hold onto a bit more of their paycheck. And even if they did, to what extent would that really change Fed policy? To be sure, many would be calling for the Fed to stop and even reverse course, but higher savings rates will be a necessary part of the rebalancing that (I believe) the Fed expects will happen at some point. Remember, the US is currently consuming roughly 6.4% (the current account deficit) more goods and services than it produces. I doubt anyone at the Fed believes such a situation can continue indefinitely.

    In practice, I suspect that rebalancing will require slower demand growth to eliminate this gap – implying a risk that the Fed will raise rates higher in a deliberate attempt to hold growth lower than at any time in recent memory. I think this will come as a surprise to many, but in my opinion the Fed has been sending signals left and right that a change is coming. And, if estimates of potential growth are falling as well, as I read into San Francisco Fed President Janet Yellen’s speech last week, that change may be coming sooner than expected.

    UPDATE [by Mark Thoma]: Bloomberg’s John M. Berry:  Rates are Going Up, Long-Run Target Higher than Before Katrina

    The CBOT did not report the probability that the federal funds target will be raised on Friday for reasons I am unsure of, but John Berry of Bloomberg reports it as 94%.  He believes the Fed will raise rates and indicate further rates are to be expected.  In addition, though he expects some change in the language from the minutes, he does not expect the language to change substantially.  Finally, he believes the overall impact of Katrina is to raise the interest rate target that will ultimately be viewed as neutral by the Fed:

    Fed Will Raise Rates and Indicate More to Come, John M. Berry, Bloomberg: Federal Reserve officials are set to raise their target for the overnight lending rate tomorrow, and financial markets have gradually accepted that the devastation from Hurricane Katrina won't deter them. Trading in 30-day federal funds futures contracts on Sept. 16 indicated that investors accord a 94 percent probability that the target would be raised by a quarter-percentage point, to 3.75 percent, compared with only a 6 percent probability of no change. On the other hand, there has been widespread speculation that officials will make some significant changes in the forward- looking portion of the statement that will be issued at the end of the Federal Open Market Committee meeting. … there are good reasons to expect no change at all in that key paragraph in tomorrow's statement. … removing the word ''accommodation'' would imply that officials believe they have raised their overnight rate target as much as their need to. … Given the level of inflation pressures in the economy, intensified by surging energy prices, that's a very unlikely conclusion for Fed officials to make at this point. Second, what would the message to the markets be if the word ``measured'' were removed? That officials were preparing to pause in their drive to move the overnight rate target to the so-called neutral level? Or that they were contemplating a 50 basis-point move at their November meeting? … the degree of inflation pressure would argue against a wording change that could be interpreted as pointing to a pause. Finally, it isn't at all likely that the balance of risks portion of the statement would be changed. … What will change in tomorrow's statement is that the paragraph explaining how the committee views current economic conditions … In other words, the officials are going to describe how they expect the economy to evolve in the wake of the hurricane. … they are likely to say … that the overall impact on the U.S. economy will be ''transitory'' and ''temporary.''… No one, including Fed officials, knows how high the overnight rate target eventually will go. It's very likely that the responses in the marketplace and in the halls of government to Katrina will make that point higher than it otherwise would have been.

    UPDATE [by Mark Thoma]: Rates Falling in UK?  Here's some news indicating rates are headed in the opposite direction in the UK.  This is just for information, I don't mean to imply it will influence the Fed's rate decision:

    Rate cuts predicted if growth in UK falls short, by Chris Giles and Scheherazade Daneshkhu, FT: There is a “serious risk” that economic growth will fall short of the Bank of England's forecast, forcing further interest rate cuts, Stephen Nickell, a member of its monetary policy committee, has told the Financial Times. … Mr Nickell's views are in line with those expressed in a speech on Friday by David Walton, another committee member. Together they suggest that a significant proportion of the MPC is feeling uncomfortable about its August growth forecast... Mr Nickell said he saw few signs that inflationary expectations had risen, in spite of high oil prices...

    UPDATE [by Mark Thoma]: From Bloomberg:

    The following are the results of the survey, conducted from Sept. 13 to Sept. 16.

                        Drop       Sept. 20  Dec. 31   Dec. 31
    Firm                Measured?  Target    Target   10-Yr Yield

    ABN Amro              No       3.75%     4.00%     4.25%
    BNP Paribas           No       3.75%     4.25%     4.50%
    Banc of America       No       3.75%     4.00%     4.45%
    Barclays Capital      No       3.75%     4.25%     4.50%
    Bear Stearns          No       3.75%     4.25%     5.00%
    CIBC World Markets    No       3.75%     3.75%     4.05%
    Citigroup             N/A      3.75%     4.00%     4.25%
    Countrywide           No       3.75%     4.00%     4.70%
    CSFB                  No       3.75%     4.25%     4.15%
    Daiwa                 No       3.75%     4.00%     4.55%
    Deutsche Bank         No       3.75%     4.25%     5.00%
    Dresdner              Yes      3.75%     3.75%     4.10%
    Goldman Sachs         N/A      3.75%     4.00%     4.20%
    HSBC                  Yes      3.50%     3.75%     4.00%
    JPMorgan Chase        No       3.75%     4.25%     4.75%
    Lehman Brothers       No       3.75%     4.25%     4.70%
    Merrill Lynch         Yes      3.50%     4.00%     4.25%
    Mizuho                No       3.75%     4.00%     4.60%
    Morgan Stanley        N/A      3.75%     4.00%     4.35%
    Nomura                No       3.50%     3.75%     4.25%
    RBS Greenwich         No       3.75%     4.25%     4.90%
    UBS Securities        No       3.50%     4.00%     5.00%

    Median                                             4.48%

    [by Mark Thoma]:  CBOT Fed Watch:  Chance of 25 bps Hike is 92%

    The chance of a 25 bps rate hike at the next FOMC meeting, according to the market's assessment at today's close, has fallen slightly from 94% on Friday to 92% today:

    CBOT Fed Watch: Based upon the September 19 market close, the CBOT 30-Day Federal Funds futures contract for the October 2005 expiration is currently pricing in a 92 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3-1/2 percent to 3-3/4 percent at tomorrow’s FOMC meeting (versus an 8 percent probability of no rate change):

    September 13: 18% for No Change versus 82% for +25 bps.
    September 14: 16% for No Change versus 84% for +25 bps.
    September 15: 14% for No Change versus 86% for +25 bps.
    September 16:   6% for No Change versus 94% for +25 bps.
    September 19   
    8% for No Change versus 92% for +25 bps.

    September 20:  FOMC decision on federal funds target rate.

      Posted by on Sunday, September 18, 2005 at 10:31 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (3) 

      All Around the Carpenter’s Bench, Pop! Goes the Bubble…

      Daniel Akst makes some reasonable points about the housing boom.  But I wouldn't break out the Champagne over the short-run transitional costs people must endure as the economy is rebalanced like he would even if there are long-run gains. I also wouldn't say, as he does, that the housing boom was necessarily a bad thing - if low interest rates propped up consumption and investment and avoided a recession then there is an argument that policy reduced the variation in output.  So maybe the bubble loved us after all:

      Pop Goes the Bubble? Maybe It's Time to Cheer, by Daniel Akst, NY Times Commentary: ...Now that home prices in some markets are showing signs of moderating, lamentations are rising from all sides about the many bad things that may happen... Unfortunately, all of this hand-wringing tends to distract from the essential truth about soaring home prices, which is that they are a bad thing... the housing bubble never loved you. The bubble is not even your friend. In fact, the very best thing you can say about the passing of this particular bubble is "good riddance."

      What's so bad about skyrocketing home prices? ... First, they make life awfully difficult for people who aren't already homeowners and do little for people who are, because selling one inflated house only to buy another affords little profit. ... it probably also suppresses other kinds of saving and encourages excessive debt. And it has helped addict global producers to American consumerism, because it gives Americans the confidence - and in many cases the wherewithal - to spend some of the inflated value of their homes. ... Sky-high home prices also divert too much capital into home building from potentially more productive uses. And these prices fuel risky, not especially useful speculation in residential real estate. ... Excessive home prices divert human capital as well. The National Association of Realtors had 1.1 million members at the end of 2004, up from 766,560 in 2000. It's hard to believe that such an increase would have occurred if there had been no housing bubble. Finally, wouldn't it be better for society ... if people could buy a home without resorting to ... loans ... that are risky for borrowers and lenders alike? ... High home prices may contribute to social and economic inequality by making ... it nearly impossible for people without enormous incomes to afford homes in places with the kind of desirable school systems that can help put children onto a higher earnings trajectory.

      But if inflated home prices are bad, isn't the end of a housing bubble worse? Not necessarily. There is always pain associated with market adjustments... The Federal Reserve, through its monetary policy of low interest rates, has propped up real estate prices for years. Other government policies, from zoning to building codes, are doing likewise... If prices moderate, maybe we won't gobble up open space as quickly. Lower prices will clearly deter some speculators, who will put their money to work elsewhere. And some of those real estate brokers will find something else useful to do. Best of all, people at dinner parties and soccer games will have to find something more interesting to talk about. That alone makes the end of the housing bubble a good excuse to break out the Champagne.

      Even though he wants to break out the Champagne, somehow I don't picture Daniel Akst as a throw caution to the wind and let's party kind of guy.

        Posted by on Sunday, September 18, 2005 at 12:54 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (11) 

        The Glut of Men

        Here's one way labor markets have been changing since 1970, particularly for workers aged 20-44.  In 1970 there were approximately 95 men per 100 women in this age group.  Today the ratio is around 102 men per 100 women:

        More Boys Than Girls, by Rodger Doyle, Scientific American:  [T]he sex ratio ... [is generally]... defined as the number of males per 100 females... Before World War I, immigrants, who tended to be predominantly male, kept the ratio high. Restrictive legislation in the 1920s and the Great Depression of the 1930s reduced the influx to a trickle. Beginning in the 1940s, lung cancer and cardiovascular disease, both of which affected men far more than women, resulted in an increasing proportion of females. The rise in the ratio since 1970 has resulted from a greater reduction in mortality among males than females. ... The rising sex ratios of the past few decades means that American women of mating age are becoming, for the second time in U.S. history, a scarce commodity in the marriage market, although over the foreseeable future they will not be as rare as in earlier times...

        Number of men per 100 women in the U.S.

          Posted by on Sunday, September 18, 2005 at 12:34 AM in Economics | Permalink  TrackBack (0)  Comments (2) 

          Saturday, September 17, 2005

          CNN/Money's List of Riskiest Mortgage Arrangements

          Here is CNN/Money's list of the five riskiest mortgages and a table showing the percentages in selected regions. I have one of these:

          Just how crazy are crazy mortgages? Check these out:

          Interest-only mortgage:

          • How it works: In the first three to 10 years, your payments cover only interest, not principal.
          • The risk: When the interest-only term is up, your payments could increase so much that you can't afford your mortgage.
          • Right for you if...You plan to move before the term ends, or you can count on earning more money soon.

          Option- or flexpayment ARM:

          • How it works: You choose what to pay every month: the standard principal and interest, only interest or a minimum that's less than what's needed to cover the interest.
          • The risk: If you make minimum payments, the rest of that month's interest is tacked on to the loan balance , so you could easily end up owing more than your home is worth.
          • Right for you if...You need the flexibility to make smaller monthly payments once in a while -- but only once in a while.

          40-year fixed mortgage:

          • How it works: You pay the loan off over 40 years instead of the usual 15 or 30.
          • The risk: You will pay more interest over the term of the loan. Plus, it takes a loooong time to build equity.
          • Right for you if...You can't afford a shorter-term loan but don't want to take on a lot of interest-rate risk.

          Piggy-back loan:

          • How it works: By taking out two loans (a traditional mortgage and a home-equity loan or line of credit for the 20 percent down payment) you can avoid private mortgage insurance.
          • The risk: If the price of your house drops, you have no equity cushion, leaving you at risk of owing more than your home is worth.
          • Right for you if...You have money saved for a down payment but fall a little short of 20 percent.

          No-doc or low-doc loan mortgage:

          • How it works: This loan lets you borrow without proving you meet the usual income requirements and, in some cases, without documenting your income at all. Most lenders expect you to have a credit score of at least 620.
          • The risk: Borrowing more than you can afford. Plus, depending on your credit score and how much documentation you provide, the rate may be one-half to three points higher than an equivalent full-doc loan.
          • Right for you if...You don't earn enough to qualify for a normal loan (say, if you're starting a business), but you know you won't have trouble making the mortgage payments.

          Here's the table showing geographic regions with new-home buyers with interest-only and option payment ARMs in the first six months of 2005:

          Danger zones

          In these hot markets, about half of today's home buyers are
          resorting to creative financing.

          Metro area % Buyers with
          nontraditional loans
          Santa Cruz/Watsonville, Calif. 55
          San Francisco 53
          Washington, D.C. 52
          Boulder/Longmont, Colo. 49
          Oakland 49

          That makes it easy to understand why warnings such as this from Fed Governor Olson echoing Greenspan's view are being issued by the Fed. Maybe I should listen.

            Posted by on Saturday, September 17, 2005 at 03:50 PM in Economics, Housing | Permalink  TrackBack (0)  Comments (4) 

            A Glut of Delightful Cynicism

            This is a very interesting analysis from Ben Carliner at Cynic's Delight. It discusses efforts to develop bond markets in Asia to absorb the glut of Asian saving and the implications of this development for the U.S.:

            Cynic's Delight: The Glut of Asian Savings Looks for New Bond Markets: James Carville is supposed to have once said:

            I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter… but now I want to come back as the bond market. You can intimidate everybody.

            It seems that Asian policy makers are taking his advice to heart. The Asian Bond Market Initiative (ABMI), a cooperative effort on the part of the Asean + 3 finance ministries and the Asian Development Bank (ADB), is actively trying to mobilize Asian savings through new and improved domestic capital markets. Domestic Asian bond markets have been growing like gangbusters in recent years, and as they grow ever more deep, liquid and sophisticated, they will provide opportunities for Asian savers to invest at home. Given that the Asian demand for US Treasuries has been propping up the dollar and keeping US interest rates low, the rise of Asian bond markets has profound ramifications for the global economy, and dollar exchange rates and US interest rates in particular.

            The recent efforts to promote capital markets across the Pacific are, admittedly, starting from a low level and have many hurdles to overcome. But concerted efforts from government ministries and financial institutions are starting to yield results. The size of domestic bond markets across East Asia have tripled since 1997, and corporate issues have grown at an 18% annual pace. The total amount outstanding of local currency denominated bonds in East Asia reached 44% of GDP last year, up from just 19% in 1997.

            While the development of modern capital markets makes good economic sense in and of itself, much of the impetus for the current efforts stems from the Asian financial crisis of 1997 and a growing awareness that Asian savings could be put to better use at home, funding improved infrastructure and capacity expansions. One of the primary causes of the 1997 Asian financial crisis was the lack of domestic bond markets in East and Southeast Asia. ... One way of avoiding forced currency devaluations is, of course, to hold on to large amounts of hard currency reserves. This was certainly one of the lessons learned by Asian policy makers after ’97 and explains their eagerness to buy so many US Treasury bonds. But the crisis also brought home the need for increased regional cooperation and more sophisticated capital markets. Both the Chiang Mai Initiative, a series of bilateral swap arrangements designed to enhance foreign exchange reserves, and the Asian Bond Market Initiative (ABMI), were outgrowths of the response to the ’97 crisis. Going forward, domestic bond markets in Asia face a number of challenges. ... ABMI will not achieve its goals overnight. But in the medium to long term, deep and liquid capital markets in East Asia could fundamentally reshape the international financial landscape and provide a mechanism for unwinding the global savings imbalance...

              Posted by on Saturday, September 17, 2005 at 01:44 AM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (0) 

              Cato's Proposed Budget Cuts to Offset Spending on Katrina

              Here's White House economic adviser Allan Hubbard:

              Katrina recovery costs to raise deficit, CNN/Money:  President Bush's advisers said Friday billions of dollars needed to rebuild New Orleans and the Gulf Coast will be borrowed and will raise the deficit, but Bush still wants to extend tax cuts... "There's no question that the recovery will ... add to the deficit," said White House economic adviser Allan Hubbard, while stressing it is a one-time cost. At the same time, he said, Bush wants to extend tax cuts that were a hallmark of his economic recovery plan but which Democrats would like to end because of the impact on the budget deficit. "The last thing in the world we even need to be thinking about is raising taxes. A strong economy is what is going to pay for rebuilding the affected areas," Hubbard said.

              Bush said directly that programs would be cut to pay for the spending (Bernanke too). In case you were wondering what Bush had in mind for cuts to offset spending on Katrina, one possibility is Cato's plan.  Take a close look and see what you think.  Then remember this only covers a third or less of the projected spending for Katrina (62 out of the 200 billion), and less than one sixth of the 400 billion dollar overall deficit projected by Cato.  So, at best, this is only covers a third of the spending on the recovery from the hurricane, but at least we finally have a few cards on the table:

              Proposed Budget Cuts to Offset Katrina Spending

              Annual savings in $billions

              Program Savings Rationale
              Farm subsidies: cut in half $10.6 Wasteful and have negative environmental and trade effects
              NASA: cut in half $7.9 NASA is obsolete with the arrival of private manned space flight
              Energy research and subsidies $6.2 Private sector responsibility
              Subsidies to airports $5.8 Airports should be privatized as in dozens of major foreign cities
              Community development grants $5.4 Projects such as parking lots and sidewalks are a local responsibility
              USAID (foreign aid) $4.7 Duplicates Bush Millennium Challenge Corporation foreign aid agency
              Army Corps of Engineers $4.6 Civilian activities should be privatized or devolved to the states
              Homeland security grants $4.2 Homeland security grants to states have been mired in scandal
              Foreign economic aid $2.7 Foreign economic aid does not work
              Rural subsidies $2.5 Wasteful and unfair to urban taxpayers
              Bureau of Indian Affairs $2.4 BIA is scandal-plagued. Tribes earn $19 billion annually from gambling
              Davis-Bacon Act: repeal $2.0 Repeal Davis-Bacon and the Service Contract Act to cut federal costs
              Air traffic control $1.6 "Privatize air traffic control as in Canada and Britain"
              Trade adjustment assistance $1.0 Unneeded giveaway that is in addition to unemployment insurance
              Amtrak $0.4 Privatize the rail system
              Total $62
              Source: Chris Edwards and Stephen Slivinski, Cato Institute, based on Budget of the U.S. Government, FY2006.

              Where will the remaining 1oo billion or so come from for Katrina, and where will the cuts be made to cover a couple of hundred billion more to eliminate the remaining deficit? And remember, as explained here, an increase in taxes of one dollar does not harm those affected by the hurricane any more than a one dollar decrease in government spending.

                Posted by on Saturday, September 17, 2005 at 01:01 AM in Budget Deficit, Economics, Policy | Permalink  TrackBack (1)  Comments (12) 

                Friday, September 16, 2005

                Read His Lips: No New Taxes!

                I have bad news for the president. He says that we can’t raise taxes to help pay for the recovery effort from Katrina because that would lower output and hurt those that were affected by the hurricane and its aftermath. Instead, we have to reduce government spending. But here’s the problem. A dollar reduction in government spending reduces output at least as much as a dollar increase in taxes, though with an MPC near one currently they aren’t much different (remember the balanced budget multiplier?). They could, I suppose, make some argument that it will increase growth in the long-run, but that doesn’t help much with the short-run problem in New Orleans. When it comes to helping those affected by the hurricane, a dollar increase in government spending to help rebuild matched by a dollar increase in taxes to pay for it has just as large an impact on output as reducing government spending by a dollar elsewhere. The effect on output is not a reason to choose a reduction in government spending over an increase in taxes.  Furthermore, it has the same effect on the budget. So I’m not buying the argument that spending will need to be cut to help with the disaster:

                Bush Rules Out Tax Increases to Pay for Hurricane Recovery, By David Stout, NY Times:  President Bush ruled out tax increases to pay for hurricane and flood recovery today, saying instead that federal spending would have to be cut to help the Gulf Coast recover. "We got to maintain economic growth, and therefore we should not raise taxes," Mr. Bush said. ... The president did not go into detail ... on what programs he sees as likely candidates for spending cuts. He said the White House Office of Management and Budget would work with Congress to see not only where to cut but "to maintain economic growth and vitality" as well as help in the long recovery along the Gulf of Mexico. ... Heated discussions between the White House and Congressional leaders, including some Republicans, over how to pay for the recovery effort now seem inevitable. Some Republicans were worrying publicly about the rising federal deficits even before Mr. Bush pledged a huge federal role in the recovery ... and before his "no new taxes" pledge today. The ranks of Republicans include more than a few "deficit hawks" who expressed fears - well before the military campaign in Iraq, let alone the natural disaster in the Gulf Coast region - that spiraling deficits might have to be paid for far into the future...

                [UpdateVox Baby also comments.]

                  Posted by on Friday, September 16, 2005 at 03:22 PM in Budget Deficit, Economics, Politics | Permalink  TrackBack (0)  Comments (12) 

                  Fed Governor Olson: No National Housing Bubble, only Froth

                  Bloomberg reports on Federal Reserve Governor Mark Olson’s remarks after the speech discussed in the post before this one:

                  Fed's Olson Urges Care With 'Novel' Home Mortgages, Bloomberg:  Federal Reserve Governor Mark Olson urged U.S. lenders to use care with "non-traditional'' types of home mortgages such as interest-only and adjustable-rate loans, because some borrowers will be ''severely challenged'' to repay them if interest rates rise. Olson didn't discuss monetary policy or the economic outlook ... His comments on mortgages echo remarks by Fed Chairman Alan Greenspan in July that he is "concerned'' about some types of "exotic'' mortgages, such as loans that let a borrower pay no principal for a period. ... Olson told reporters afterward that ''we do not see a national bubble'' in home values." What we have noticed is the rate of appreciation in values in some markets is clearly unsustainable and in some markets we've seen what the chairman referred to as 'froth,' '' Olson said. ''It seems likely the rate will at least plateau and in some places could even decline.''

                  I suppose it's worth pointing out, without attaching too much significance to it, that he is warning about potential problems from higher interest rates in the future.

                    Posted by on Friday, September 16, 2005 at 12:33 PM in Economics, Housing, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                    Federal Reserve Governor Olson Says Banks in New Orleans are Healthy

                    Federal Reserve Governor Mark Olson spoke today, and I was hoping he would make the Fed's intent at its next FOMC meeting more transparent.  No such luck. Here’s the speech.  He does outline how the Fed altered check clearing, cash services, and so on in response to Katrina.  The only quote that caught my attention was this one indicating the Fed sees little problems ahead for affected banks:

                    ...The Federal Reserve Bank of Atlanta also reminded the depository institutions it serves that ...  the discount window was and is available to assist them in meeting their liquidity needs. ... At this time, we have not seen evidence of significant funding difficulties or problems in balance-sheet management. ...the banking industry on the whole has shown resilience and flexibility in its response to this challenging situation. While the challenges have by no means passed, banks appear to be taking the appropriate actions to provide their customers with access to much-needed cash and banking services...

                      Posted by on Friday, September 16, 2005 at 08:01 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                      A Fistful of Talk on the German Election

                      I’ll admit it. I don’t know as much as I should about the German election on Sunday between centre-right Christian Democrat (CDU) Angela Merkel and centre-left Social Democrat (SPD) and current Chancellor Gerhard Schroeder. This discussion between Edward and Tobias at Fistful of Euros helped:

                      Once In Another Lifetime, by Edward: Former UK prime minister Harold Wilson coined the phrase ’a week is a long time in politics’. Well I don’t know about a week, but two months certainly is. Back on July 12 Doug Merrill was wryly posting about “Things You Can Do When You’re 20 Points Up in the Polls”. Maybe he’d now like to do another one about things you can’t do when you’ve just lost your overall majority. I think Merkel’s face tells it all, we’re now back with Fassbinder and deeply ensconced in ’fear eats the soul’ territory. Whatever the outcome on Sunday, this will surely have to go down as one of the worst run political campaigns in recent history. As Tobias was suggesting to me at the weekend, maybe somewhere deep down inside they just don’t want to win.   

                      CDU: Screwing up on purpose?, by Tobias Schwarz: Ok, now that Edward has already mentioned it, I might as well explain in a little more detail what I meant by saying that “on some level, the CDU might be afraid to win.”

                      Last Saturday evening, strolling through Stockholm’s Gamla Stan, Edward asked me about my gut feeling concerning the outcome of the German election next week. I told him that, while it was rather entertaining, this campaign has also been confusing - and confused - in many ways, particularly when looking at the CDU. And I believe the confused and confusing campaign the CDU is conducting is even more an expression of the way the German establishment is puzzled about the way ahead than the fact that Schröder “called” the elections a year too early, too early for any of his reforms to have any perceptible impact on the economy, not even in the West.

                      ...[T]he CDU’s super-majority in the upper federal chamber, the Bundesrat that will make a CDU chancellor more powerful with respect to the state premiers even of her own party than has been the case in a long time ... means that there are no more institutional excuses for a chancellor presiding over a CDU-FDP coalition from next Sunday on. A Chancellor Merkel, once elected by the Bundestag, would indeed be much more bound to do what she promised than most politicians like. That ... made many within her party realise that calls for radical reforms are no longer simply opposition politics. They may actually get what they called for, and many suddenly realised that they were - to put it this way - apprehensive about what exactly they would do to the country by doing what they said they wanted all along.

                      Citing Ronald Reagan is one thing when there are no institutional consequences, it is something entirely different in a campaign that has, despite being fought almost entirely on economic issues, brought back the notion that there is more to the German economic future than the internalisation of social externalities. It is one thing to believe that radical labour market reforms will right many of the wrong incentives, that the gains from ridding an obscure tax code from transaction costs will create a more just tax system, and to actually be faced with the prospect of having to do so. The CDU realizes right now, governance matters, the state matters. Certainly, Schroeder and the SPD’s campaign have been quick to spin the images from New Orleans and the CDU’s internal debate about a “flat tax” (that is not really a flat tax) that was brought into the debate by Merkel’s nomination of Paul Kirchhof, a professor and former constitutional judge, who has pursued tax reform as a pet project for years…

                      Last year, there was a movie called “How to get rid of a guy in ten days” - this year’s CDU campaign is a collection of amateur mistakes that is reminiscent of a potential screenplay for the film “how to lose a non-surplus-coalition majority within two weeks.” It’s not that the CDU is not attempting to win in the sense that they do not want to govern. They do. But I think many of them, certainly within the league of state premiers would be relieved with the prospect of a “grand coalition”. One without Kirchhof, with more labour market reforms, but a less radical model of tax reform, and a new, less bureaucratic, model of health reform designed to include non-wage income into the public health redistribution system. In some sense, in her political need to be more reformist than the rest, Merkel may have been forced to outrun the CDU’s rank and file, whose conservative instincts may have been reactivated at the “wrong moment”, offering her internal - not just the external - opposition an opportunity to attack her.

                      That’s why I think the CDU’s campaign is as bad, confusing and confused as it is. And I’m not even talking about their posters…

                        Posted by on Friday, September 16, 2005 at 03:33 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (0) 

                        The New Krugman Deal

                        This may be my last chance to do this for awhile, The Times is taking our free ice cream away, so here’s Krugman's latest column from beginning to end:

                        Not the New Deal, By PAUL KRUGMAN, New York Times: Now it begins: America's biggest relief and recovery program since the New Deal. And the omens aren't good. It's a given that the Bush administration, which tried to turn Iraq into a laboratory for conservative economic policies, will try the same thing on the Gulf Coast. The Heritage Foundation, which has surely been helping Karl Rove develop the administration's recovery plan, has already published a manifesto on post-Katrina policy. It calls for waivers on environmental rules, the elimination of capital gains taxes and the private ownership of public school buildings in the disaster areas. And if any of the people killed by Katrina, most of them poor, had a net worth of more than $1.5 million, Heritage wants to exempt their heirs from the estate tax.

                        Still, even conservatives admit that deregulation, tax cuts and privatization won't be enough. Recovery will require a lot of federal spending. And aside from the effect on the deficit - we're about to see the spectacle of tax cuts in the face of both a war and a huge reconstruction effort - this raises another question: how can discretionary government spending take place on that scale without creating equally large-scale corruption?

                        It's possible to spend large sums honestly, as Franklin D. Roosevelt demonstrated in the 1930's. F.D.R. presided over a huge expansion of federal spending, including a lot of discretionary spending by the Works Progress Administration. Yet the image of public relief, widely regarded as corrupt before the New Deal, actually improved markedly. How did that happen? The answer is that the New Deal made almost a fetish out of policing its own programs against potential corruption. In particular, F.D.R. created a powerful "division of progress investigation" to look into complaints of malfeasance in the W.P.A. That division proved so effective that a later Congressional investigation couldn't find a single serious irregularity it had missed. This commitment to honest government wasn't a sign of Roosevelt's personal virtue; it reflected a political imperative. F.D.R.'s mission in office was to show that government activism works. To maintain that mission's credibility, he needed to keep his administration's record clean.

                        But George W. Bush isn't F.D.R. Indeed, in crucial respects he's the anti-F.D.R. President Bush subscribes to a political philosophy that opposes government activism - that's why he has tried to downsize and privatize programs wherever he can. (He still hopes to privatize Social Security, F.D.R.'s biggest legacy.) So even his policy failures don't bother his strongest supporters: many conservatives view the inept response to Katrina as a vindication of their lack of faith in government, rather than as a reason to reconsider their faith in Mr. Bush. And to date the Bush administration, which has no stake in showing that good government is possible, has been averse to investigating itself. On the contrary, it has consistently stonewalled corruption investigations and punished its own investigators if they try to do their jobs.

                        That's why Mr. Bush's promise last night that he will have "a team of inspectors general reviewing all expenditures" rings hollow. Whoever these inspectors general are, they'll be mindful of the fate of Bunnatine Greenhouse, a highly regarded auditor at the Army Corps of Engineers who suddenly got poor performance reviews after she raised questions about Halliburton's contracts in Iraq. She was demoted late last month. Turning the funds over to state and local governments isn't the answer, either. F.D.R. actually made a point of taking control away from local politicians; then as now, patronage played a big role in local politics. And our sympathy for the people of Mississippi and Louisiana shouldn't blind us to the realities of their states' political cultures. Last year the newsletter Corporate Crime Reporter ranked the states according to the number of federal public-corruption convictions per capita. Mississippi came in first, and Louisiana came in third.

                        Is there any way Mr. Bush could ensure an honest recovery program? Yes - he could insulate decisions about reconstruction spending from politics by placing them in the hands of an autonomous agency headed by a political independent, or, if no such person can be found, a Democrat (as a sign of good faith). He didn't do that last night, and probably won't. There's every reason to believe the reconstruction of the Gulf Coast, like the failed reconstruction of Iraq, will be deeply marred by cronyism and corruption.

                          Posted by on Friday, September 16, 2005 at 02:34 AM in Economics, Policy, Politics, Social Security | Permalink  TrackBack (0)  Comments (8) 

                          Showdown at the Social Security Corral

                          Is Social Security legislation finally dead for this year?  It’s looking that way after Ways and Means Chairman Bill Thomas was rebuffed in a National Republican Congressional Committee meeting by Chairman Thomas M. Reynolds:

                          Social Security Legislation Could Be Shelved, by Jonathan Weisman, Washington Post: National Republican Congressional Committee Chairman Thomas M. Reynolds will recommend to the House Republican leadership that the party drop its effort to restructure Social Security, at least for this year, House Republican aides confirmed yesterday. ... House and Senate leaders had already pushed off consideration of cuts in taxes and entitlement spending until the end of October. President Bush's tax reform panel has delayed release of its recommendations. Now, Social Security legislation, which already faced a steep uphill climb, might be shelved indefinitely. Senate Republican leaders had decided they could not move on Social Security until the House did. But with the Senate at a stalemate, House political strategists want to pull back as well. .. Reynolds (R-N.Y.) made his stand in a showdown with House Ways and Means Chairman Bill Thomas (R-Calif.), according to two witnesses. At a committee luncheon Wednesday, Thomas told panel members he was pushing forward with broad retirement security legislation that would include measures to strengthen private pensions, promote personal savings and add private investment accounts to Social Security. Reynolds then stood to say he would recommend to the leadership that it do no such thing. Thomas would not comment on the events. ... Carl Forti, a spokesman for the National Republican Congressional Committee, said he could not confirm the ... But he did not deny the report. ... David John, a proponent of Social Security private accounts at the conservative Heritage Foundation, said Reynolds's views are well known but hardly the last word...

                            Posted by on Friday, September 16, 2005 at 01:35 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (5) 

                            Thursday, September 15, 2005

                            Bernanke: Hurricane Effects Transitory, Will Need to Cut Programs to Reduce Deficit

                            Ben Bernanke, chair of the Council of Economic Advisers, said again today the effects of Katrina will be transitory and growth should pick in the fourth quarter and, if not by then, “...certainly in the first half of next year.” He also addresses the budget implications of the hurricane and acknowledges the need to cut programs in the future to reduce the deficit. However, I would still like to see more definitive plans for reducing the deficit.  Saying you need to cut programs is far different than saying which specific programs will be cut:

                            Bernanke sees brief Katrina hit on US economy, Reuters: Hurricane Katrina will hurt the U.S. economy in the short term, but bright long-run prospects mean the Bush administration can push ahead with its reform agenda, a top White House economic adviser said on Thursday. "In the shorter term, the devastation wrought by Hurricane Katrina will have a palpable effect on the national economy," White House economic adviser Ben Bernanke said in prepared remarks for delivery at the National Press Club. But he also said the private sector forecast healthy long-run growth. ... Bernanke said the budget deficit would rise in the short term as a result. But he stressed that as much of the money as possible should be offset through future spending cuts. "What we need to do is consider the President's budget proposal and be more aggressive in cutting duplicative or unnecessary programs," he told reporters after the speech. ... Bernanke, a former Federal Reserve governor who is regularly mentioned as a potential successor to Federal Reserve Chairman Alan Greenspan, offered no estimate of how much growth he thought might be erased by the storm, ... "In particular, the virtual shutting down of the Gulf Coast economy will leave its imprint on the national rates of job creation and output growth, especially in the third quarter," he said. But rebuilding of the area should add to growth "perhaps by the fourth quarter and certainly in the first half of next year." He said that while energy refining and distribution facilities were hard-hit, progress was being made on repairing them while supplies from the government's Strategic Petroleum Reserve were easing the pinch. ... Bernanke said the White House intends to continue pursuing policies that make the economy able to withstand shocks and that will keep growth on track. "These policies include making tax relief permanent, reducing the budget deficit by limiting spending, strengthening retirement and health security through efforts like Social Security reform ... and enhancing energy security,"...

                              Posted by on Thursday, September 15, 2005 at 05:49 PM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (0) 

                              CBOT Fed Watch: Chance of 25 bps Rate Hike increases to 86%

                              The chance of a 25 bps rate hike at the next FOMC meeting, according to the market's assessment at today's close, has increased from 82% on Monday to 86% today:

                              CBOT Fed Watch: Based upon the September 15  market close, the CBOT 30-Day Federal Funds futures contract for the October 2005 expiration is currently pricing in an 86 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3-1/2 percent to 3-3/4 percent at the FOMC meeting on September 20 (versus an 14 percent probability of no rate change):

                              September 13: 18% for No Change versus 82% for +25 bps.
                              September 14: 16% for No Change versus 84% for +25 bps.
                              September 15: 14% for No Change versus 86% for +25 bps.
                              September 16:
                              September 19

                              September 20:  FOMC decision on federal funds target rate.

                                Posted by on Thursday, September 15, 2005 at 03:33 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                Deficit Madness

                                This is yet another call, this time in a guest commentary at the NRO Financial, to cut dividend taxes, capital gains taxes, estate taxes, and whatever else is possible politically, even after Katrina. Yet in this entire 719 word essay there is not a single word about how to pay for the deficit by cutting programs or raising taxes, only vague inferences that cutting taxes pays for itself.  Do they honestly believe that cutting taxes will eliminate the deficit?  There’s nothing in the past to suggest that will work. And if they don’t truly believe that revenues will increase, then this is a hidden agenda to force cuts in the size of government down the road by intentionally creating a budget crises.  Either way, I would like to see writers such as this one begin to tell us precisely how they believe their ideas will be funded.  Not some vague idea about how cutting taxes raises revenue, but let’s hear the specifics, let’s hear a real plan.  How much revenue will be generated and when?  What programs will be cut?  Because so far all that has happened is that the budget hole has gotten deeper and deeper with each new vague promise of tax-cut induced government prosperity:

                                Tax Cuts Are Katrina Relief, by Mallory Factor, NRO: Hurricane Katrina wrought a devastating human tragedy. The White House and congressional leaders are rightly rushing to help. But they should not do so at the expense of the free-enterprise agenda… The politically correct notion that it is insensitive to continue with vital pro-growth policies in the aftermath of Katrina hurts the nation generally and has an adverse impact on the people most in need of help. Promoting economic growth and prosperity is important, now more than ever... In the last two years, the economy has grown by about $1.5 trillion, which is a tribute to President George W. Bush’s 2003 tax cuts. Keeping that pie growing will make it possible to offer more to New Orleans... In fact, [we] should go further by adding some form of immediate death-tax relief to the reconciliation bill. … Policymakers should reject the notion that high taxes are needed to pay for reconstruction. Even a generous disaster-relief package is little consolation to a person who can’t find work when the economy falters... We are now committed as a country to generously and compassionately rebuilding the hurricane zone and replacing what was lost. The price tag will be high, perhaps as high as $200 billion. That’s real money, and we need a healthy, growing U.S. economy to help pay for it... With rapid economic growth, a price as high as $200 billion is more affordable... This is not the time for ... high tax rates, including the expiration of the 2003 tax cuts. This is not the time to destroy family farms and businesses ... It is not inconsiderate to underscore the vital need for policies promoting economic growth and prosperity in the wake of tragedy. It would be inconsiderate not to.


                                  Posted by on Thursday, September 15, 2005 at 02:34 PM in Budget Deficit, Economics, Press | Permalink  TrackBack (0)  Comments (6) 

                                  Yapping About Money: The Stone Money of Yap

                                  The stone money of Yap is an interesting case to consider when thinking about what money is and what role it plays in the economic and social affairs of a community. This article by Michael Bryan of the Federal Reserve Bank of Cleveland describes the stone wheels of Yap, how they were obtained and used as gift markers both within and between tribes, and whether the stones fit the textbook definition of money.  I came across this getting ready for a class this fall and thought I'd pass it along:

                                  Federal Reserve Bank of Cleveland, Island Money, by Michael F. Bryan:  ...In this Commentary, I … consider… the unique and curious money of Yap, a small group of islands in the South Pacific. … For at least a few centuries leading up to today, the Yapese have used giant stone wheels called rai when executing certain exchanges. The stones are made from a shimmering limestone that is not indigenous to Yap, but quarried and shipped, primarily from the islands of Palau, 250 miles to the southwest.

                                  The size of the stones varies; some are as small as a few inches in diameter and weigh a couple of pounds, while others may reach a diameter of 12 feet and weigh thousands of pounds. A hole is carved into the middle of each stone so that it may be carried, either by coconut rope strung through the smaller pieces, or by wooden poles inserted into the larger stones. These great stones require the combined effort of many men to lift. Expeditions to acquire new stones were authorized by a chief who would retain all of the larger stones and two-fifths of the smaller ones, reportedly a fairly common distribution of production that served as a tax on the Yapese. In effect, the Yap chiefs acted as the island’s central bankers; they controlled the quantity of stones in circulation. …

                                  The quarrying and transport of rai was a substantial part of the Yapese economy. In 1882, British naturalist Jan S. Kubary reported seeing 400 Yapese men producing stones on the island of Palau for transport back to Yap. Given the population of the island at the time … more than 10 percent of the island’s adult male population was in the money-cutting business. Curiously, rai are not known to have any particular use other than as a representation of value. The stones were not functional, nor were they spiritually significant to their owners, and by most accounts, the stones have no obvious ornamental value to the Yapese. If it is true that Yap stones have no nonmonetary usefulness, they would be different from most “primitive” forms of money. Usually an item becomes a medium of exchange after its commodity value—sometimes called intrinsic worth—has been widely established...

                                  Precisely how the value of each stone was determined is somewhat unclear. We know that size was at best only a rough approximation of worth and that stone values varied depending upon the cost or difficulty of bringing them to the island. For example, stones gotten at great peril, perhaps even loss of life, are valued most highly. Similarly, stones that were cut using shell tools and carried by canoes are more valuable than comparably sized stones that were quarried with the aid of iron tools and transported by large Western ships. The more valuable stones were given names, such as that of the chief for whom the stone was quarried or the canoe on which it was transported. Naming the stone may have secured its value since such identification would convey to all the costs associated with obtaining it...

                                  Continue reading "Yapping About Money: The Stone Money of Yap" »

                                    Posted by on Thursday, September 15, 2005 at 10:53 AM in Economics, Financial System, History of Thought | Permalink  TrackBack (0)  Comments (10) 

                                    CPI, New Jobless Claims, and Inventory Reports Released

                                    Reports on the consumer price index and new claims for unemployment benefits were released today.  The CPI report showed prices increasing by .5% last month, a 6% annual rate.  Core inflation, which excludes energy and prices, increased by .1% or 1.2% annually.  The year-over-year rates are 3.6% overall and 2.1% for core inflation. Jobless claims rose by 71,000 and 68,000 of those were attributed to Katrina.

                                    [Update - adds statements from WSJ]

                                    Continue reading "CPI, New Jobless Claims, and Inventory Reports Released" »

                                      Posted by on Thursday, September 15, 2005 at 09:45 AM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                      The Institute of International Finance Worries About Global Imbalances

                                      The Institute of International Finance is worried about the economic risks posed by global imbalances between the U.S. and other countries. The IIF highlights the risks in a letter and accompanying press release from Mr. Charles Dallara, Managing Director of the IIF, to the Ministers of Finance and Central Bank Governors who meet in Washington in a little over a week. Here are Andrew Balls and Chris Giles of The Financial Times on this issue.  A note on the IIF recommendations for monetary policy follows the discussion by Balls and Giles:

                                      G7 leaders urged to act on global imbalances, by Andrew Balls and Chris Giles, Financial Times: The world’s largest banks and financial institutions ... urged the leaders of the global economy to act together to reduce “increasingly worrisome” global economic imbalances.

                                      Continue reading "The Institute of International Finance Worries About Global Imbalances" »

                                        Posted by on Thursday, September 15, 2005 at 02:43 AM in Budget Deficit, China, Economics, International Finance | Permalink  TrackBack (0)  Comments (1) 

                                        Financial Reform in China

                                        New Economist finds an interesting piece on the need for financial reform in China. There is also a chart (and links to more) showing the sources of China's economic growth.  The chart shows the degree to which growth in China has been led by investment in recent years:

                                        New Economist: Next steps for China?: Somewhat overlooked last week was an interesting piece by Eswar S. Prasad, Next Steps for China, in the latest issue of IMF magazine Finance & Development. He argues that financial sector reform is a crucial element of a long-term growth strategy for China:

                                        The exchange rate regime is just one piece of the broader reform agenda in China. The [paper] ...assesses what China needs to do to ensure the durability of its economic expansion by addressing the looming issues of financial sector reform and the need to bolster balanced domestic-led growth.

                                        On investment, Prasad comments:

                                        Growth is undoubtedly a wonderful tonic. But there is a potential dark side associated with the fact that a significant portion of this growth in recent years has come from investment, with rising fixed investment becoming the main driver of output growth since 2001 (see Chart 3). A good chunk of this investment is likely to prove unproductive from a long-term perspective. Even building bridges to nowhere can raise output in the short term but is hardly a good use of resources. For it is ultimately consumption rather than investment or even output that is a true measure of economic welfare.

                                        The piece is quite short, but includes some impressive charts - such as the one shown. See also the China country focus chartset in the same issue.

                                        China's investment boom

                                        [Bloomberg report on China's fixed investment growth of 27.4 percent in the first two quarters.]

                                          Posted by on Thursday, September 15, 2005 at 02:34 AM in China, Economics, Financial System | Permalink  TrackBack (0)  Comments (1) 

                                          Health Insurance Costs Continue to Outpace Inflation

                                          It comes as no surprise that the rise in health insurance costs, 9.2 percent, outpaced inflation this year. An eye-opening statistic is that the annual cost of health insurance for a family is close to the annual income of a minimum wage worker. The latest wave in healthcare cost containment is “consumer-driven” healthcare. If you would like more information on the consumer-driven approach, here’s an issue brief from the non-partisan Center for Studying Health System Change. From their analysis, it is not clear that the consumer-driven approach will lower costs. Here are more details on costs from the Washington Post:

                                          Health Insurance Outpaces Inflation, Raises by Albert B. Crenshaw, Washington Post: The cost of health insurance for working Americans climbed 9.2 percent this year, the lowest rate of increase since 2000 but still far ahead of both general inflation and workers' pay increases, according to a nationwide survey by the Kaiser Family Foundation. On average, health insurance for a family cost $10,880 this year, with the employer paying $8,167 and the worker $2,713... The total cost almost exactly matches the total annual earnings of a person working full time at the minimum wage... For a single worker, the average cost totaled $4,024, with $3,413 paid by the employer and $610 by the employee, the survey found.

                                          At the same time, the proportion of employers providing health insurance continued its steady decline, falling to 60 percent this year from 69 percent five years ago. Most of the decline was among very small companies ...  noting that less than half -- 47 percent -- of firms with three to nine workers now offer medical coverage to their employees... Absent plan changes, Mercer said, employers project a rise of about 10 percent next year. Kaiser's Altman cautioned that the recent slowdown in increases should not be a cause for any great optimism. "I would say, don't be fooled by the moderation in the rate of increase. We've seen these dips before, and history teaches us they have a way of bouncing back,"...

                                          Altman and others who have watched cost-containment efforts over the years have seen such ideas as managed care burst onto the scene and appear to bring costs to heel. But each time, the new strategy has lost effectiveness, and costs resumed their seemingly inexorable climb. The current "next big thing" is what has been dubbed "consumer-driven" health care, which combines high-deductible insurance with a fund that the individual can use to cover routine costs. In these arrangements, consumers are allowed to accumulate unspent money in the fund, giving them, theorists argue, an incentive to shop and eliminate unnecessary spending. The Kaiser survey found much interest in these types of arrangements but, so far, little actual participation. … "There absolutely is growing interest in consumer-driven arrangements," Altman said, but with the small number of workers enrolled in them, "it's impossible to make a judgment about their effect on health care cost...

                                            Posted by on Thursday, September 15, 2005 at 01:44 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (2) 

                                            I Have *Got* to Have One of These!

                                            By Gull A. Bull:

                                            Gillette Is Betting That Men Want an Even Closer Shave, by Claudia H. Deutsch, New York Times:  ...The people at Gillette have a ... challenge: persuading men that they need to buy yet another new shaving system. Yesterday, Gillette unveiled Fusion (manual) and Fusion Power (battery operated), a wet-shaving system with a lot more bells and whistles than the company's Mach3Turbo and M3Power, currently the top-selling shavers. It also announced a line of shaving creams and gels to go with the new razors... Much is at stake. According to Gillette, American men spent about $1.7 billion on blades and razors last year, and another $300 million on shaving creams and gels. Globally, shaving products accounted for more than $10.4 billion in sales. [Fusion Power jpg]

                                            Continue reading "I Have *Got* to Have One of These!" »

                                              Posted by on Thursday, September 15, 2005 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (2) 

                                              Wednesday, September 14, 2005

                                              Cato Calls for Leadership from Fiscal Authorities

                                              Cato's Jagadeesh Gokhale speaks on the federal budget deficit in The Financial Times and he is not happy with the leadership he sees from the administration and congress on this issue.  The worry is that the fiscal deficit will eventually lead to debt monetization* by the Fed:

                                              Only leadership can defuse US fiscal time-bomb, by Jagadeesh Gokhale, commentary, FT: Alan Greenspan recently warned that monetary policy “cannot ignore the potential inflationary risks inherent in our current fiscal outlook . . .” He also said: “I assume that [fiscal] imbalances will be resolved before stark choices again confront us and, if they are not, the Fed will resist any temptation to monetise fiscal deficits.” ... Unfortunately, the “stark choices” fiscal policymakers would face if they fail to resolve the growing fiscal imbalance will eventually confront the Fed. Why? Because continued high deficits and growing debt will drain the economy of investible resources. It will also reduce foreign lenders’ confidence in US ability to resist the temptation to inflate away the real value of growing federal debt – much of which is held abroad. That may lead them to divert their savings from US shores, further draining domestic investment.

                                              If that happens, ... domestic unemployment will increase and political pressure on the Fed to stimulate economic activity will grow. Direct monetary stimulus entails purchasing more Treasury debt for cash to keep interest rates lower than would be consistent with an “inflation neutral” level – precisely the action Mr Greenspan abjures. So the question remains: how long can his successor continue serving the price-stability goal and ignore calls for direct action? ...

                                              Managing the public’s inflation expectations has been Mr Greenspan’s quintessential skill. ... However, and here is the really hard question, does performing such a superb job of managing inflation expectations while maintaining price stability exacerbate the problem by allowing the nation’s fiscal imbalance to grow? ... By allowing fiscal policymakers to prolong their “no tax-hikes” versus “no-spending-cuts” ... Greater confidence in the ability of monetary policy to mop up problems created by fiscal profligacy may be enabling the very irresponsible fiscal policies ... Ultimately, defusing the fiscal time-bomb will require sustained leadership directly in federal fiscal management.

                                              We've seen this game between the fiscal and monetary authorities before.  I’m sure I disagree with Cato as to how to solve the deficit problem, but that aside I too worry about the pressures to monetize the debt in coming years.  That’s why I think it is appropriate and necessary for the Fed chair to discuss the implications of budget deficits and this is another place where, in my opinion, more leadership is needed.

                                              *Debt monetization occurs when the Fed prints money and uses it to purchase government debt from the private sector.  It's equivalent to printing money to finance government expenditures.

                                                Posted by on Wednesday, September 14, 2005 at 04:32 PM in Budget Deficit, Economics | Permalink  Comments (6) 

                                                Retail Sales and Industrial Production Reports Released, Doubts Expressed About Using Capacity Utilization to Measure Slack

                                                Reports on industrial production and retail sales were released today and both were lower than anticipated:

                                                Katrina Makes Impact on Industrial Output, by Martin Crutsinger, AP:  Industrial output rose only slightly in August as Hurricane Katrina severely cut back production of petroleum and chemicals along the Gulf Coast.

                                                [One Update]

                                                Continue reading "Retail Sales and Industrial Production Reports Released, Doubts Expressed About Using Capacity Utilization to Measure Slack" »

                                                  Posted by on Wednesday, September 14, 2005 at 10:08 AM in Economics | Permalink  TrackBack (0)  Comments (6) 

                                                  FT: Rates Are Going Up, But Fed Unsure What to Say

                                                  Andrew Balls of The Financial Times says the Fed will raise interest rates at its next meeting, but how to characterize the likelihood that rates will continue to increase in the accompanying statement is the subject of debate:

                                                  US Federal Reserve set to raise rates again, by Andrew Balls, Financial Times: The US Federal Reserve is set to press ahead with its campaign of raising interest rates at its meeting next week, in spite of the economic impact of Hurricane Katrina. But there is expected to be intense discussion of whether substantial changes to the wording of the accompanying policy statement are needed. Fed officials are reasonably relaxed about the hurricane's impact on national measures of production and consumer spending and employment. A small dip in the second half of the year is expected to be recovered during the reconstruction effort.

                                                  Within the Fed, there is considerable scepticism about the need for the “compassionate” pause in the tightening campaign that some politicians have called for following the devastation in New Orleans and the surrounding region caused by Katrina. An important subject of discussion will be whether the Fed should drop its characterisation of monetary policy as “accommodation” and whether it should maintain its guidance that it is likely to continue raising the federal funds rate at a “measured” pace...

                                                    Posted by on Wednesday, September 14, 2005 at 02:43 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (11) 

                                                    Dual Banking in the U.S.

                                                    Banks can be chartered by either federal or state authorities. Why do we have a dual banking system today? Alan Greenspan discussed this topic in a 1998 speech. He starts from the chartered banking era from 1781-1838, and I’ll follow his comments through the National Banking Act of 1864, though his remarks go beyond that point. The National Banking Act, which came in two parts, created federal competition to state chartered banks, introduced a national currency, and placed a tax on currency issued by state banks. It is not entirely clear if the intent of was to drive state banks out of business, but if that was the intent it was a failure. State banks responded by specializing in demand deposits (checking accounts) and they persist and remain strong to this day. Here are Greenspan’s remarks followed by recent remarks from Richard Fisher, president of the Dallas Fed, who discusses why we have allowed dual banking to persist as well as some peculiarities about dual banking history in Texas. Texas is interesting because it did not allow state banking as early as other states and it, along with a few other western states, had stringent restrictions on branching:

                                                    Chartered Banking (1781-1838): At the very beginning of our banking history, American banks ... were ... supervised by the market. But--in contrast to other countries--our banking system evolved the dual structure that so distinguishes our country from others. Those seeking to circulate bank notes in the United States in our earliest days usually sought a ... charter ... almost solely at the state level. Entry into the banking business was far from free. Indeed, by the early 1800s chartering decisions by state authorities became heavily influenced by political considerations. ... The regulation and supervision of early American banks were modest and appear to have been intended primarily to ensure that banks had adequate specie reserves to meet their debt obligations, especially obligations on their circulating notes...

                                                    Free Banking (1837-1863): The ... intense political controversy over the charter renewal of the Second Bank of the United States, and the wave of bank failures following the panic of 1837 led many states to reconsider their fundamental approach to banking regulation. In particular, in 1838 New York introduced a new approach, known as free banking, which in the following two decades was emulated by many other states. ... The perception of the free banking era as an era of "wildcat" banking marked by financial instability and, in particular, by widespread significant losses to noteholders also turns out to be exaggerated. ... Nonetheless, it is fairly clear that the strength of banks varied from state to state, with regulation and supervision uneven.

                                                    As a consequence mainly of the panic of 1837, the public became aware of the possibility that banks could prove unable to redeem their notes and changed their behavior accordingly. Discounting of bank notes became widespread. Indeed, between 1838 and the Civil War quite a few note brokers began to publish monthly or biweekly periodicals, called bank note reporters, that listed prevailing discounts on thousands of individual banks...

                                                    National Banking (1863-1913): During the Civil War, today's bank structure was created by the Congress. It seems clear that a major, if not the major, motivation of the National Bank Act of 1863 was to assist in the financing of the Civil War. But the provisions of the act that incorporated key elements of free banking provide compelling evidence that contemporary observers did not regard free banking as a failure. These provisions included free entry and collateralized bank notes. The 1863 act introduced competition to state banks, but in 1864, the Congress adopted an important amendment which called for taxing the issuance of state bank notes. It is not clear if the intention was to assure only one kind of currency or to force the states out of the banking business. But whatever its purpose, with the tax on notes the number of state banks fell from about 1,500 in 1864 to 250 by the end of the decade.

                                                    Any forecast at that time would quite reasonably have concluded that state banks would become historic relics. Such a projection, however, would have been quite wrong... Forced to find a substitute for notes, state banks pioneered demand deposits. Within ten years after the note tax, state banks had more deposits than national banks--a lead maintained, I might add, until 1943. By 1888, only 20 years after the low point, there were more state banks than national banks (approximately 3,500 vs. 3,100), a lead maintained to this day...

                                                    But why have we allowed dual banking to persist? Here's Richard Fisher, president of the Dallas Fed, on that question as well as some specifics on dual banking in Texas:

                                                    ...America’s dual banking system dates back to the National Bank Act of 1864, which gave the country national banks alongside existing state-chartered banks. Texas had to wait a bit longer for a dual banking system. ...[T]he 1845 state constitution specified that “no corporate body shall hereafter be created, renewed or extended with banking or discounting privileges.” This provision remained in the 1876 constitution, so for decades Texans had access only to nationally chartered banks and private banks. It was not until a constitutional amendment was approved in November 1904 that state banks came into existence in Texas... Today, the state-chartered banking system is competitive and strong. As of June 30, 330 of the 637 Texas banks had state charters. In the past three years, 13 of the 23 newly chartered commercial banks—or 57 percent—chose state charters. The dual banking system provides ... for decentralization of authority. As Chairman Greenspan has said, banks’ freedom to choose their regulator is a key protection from the potential for unreasonable regulatory behavior. The doctrine of choice creates a healthy dynamic among regulators. Under the dual banking system, state-chartered banks have fostered many innovations, resulting in an ever-widening array of products and services. State banks pioneered demand deposits, and a state-chartered bank introduced the NOW account. The first banks to offer variable-rate mortgages and home-equity loans came under state regulation...

                                                    So, he gives two reasons for dual banking, one perhaps a consequence of the other. First, it promotes competition among regulators which avoids unreasonable and excessive regulation. Second, by having competition in the banking system (here’s an example) and the additional freedom that dual regulation allows, financial innovation has been implemented in large part by state banks, and that has helped develop the financial services industry.

                                                      Posted by on Wednesday, September 14, 2005 at 02:34 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (0) 

                                                      Cato Presses for the DeMint and Ryan Social Security Reform Bills

                                                      I've been doing my best to keep you informed about what is going on with Social Security legislation.  If you've been following the debate closely, you know there is a rift between the White House and other elements in the GOP. The opening foray by the White House was this statement by Ben Bernanke making it clear the White House would not support reform that does not address both privatization and long-term solvency.  Reform proposals from DeMint and Ryan have an element of privatization, but do not address solvency and by most accounts make solvency worse.  That prompted, I believe, this response that appeared on the NRO website questioning Bernanke's qualifications to be Fed chair, a criticism rebutted strongly and thoroughly by Brad DeLong. The latest salvo is this statement from the Cato website:

                                                      The Personal Lockbox: A First Step on the Road to Social Security Reform by Michael D. Tanner, Cato: With President Bush’s call for comprehensive Social Security reform bogged down in the morass of partisan politics, many reform advocates have suggested starting the process with smaller steps. Recently, Sen. Jim DeMint (R-SC), Rep. Jim McCrery (R-LA), Rep. Paul Ryan (R-WI), Rep. Sam Johnson (R-TX), and others have proposed legislation to rebate Social Security surpluses to workers in the form of contributions to personal accounts. ... The Senate legislation (S1302) and House proposal (HR3304, known as GROW for Growing Real Ownership for Workers) are designed to prevent Congress from spending the surplus, which would allow individual workers to save that money toward their own retirement. ... GROW and S1302 are not -- and should not be -- the final word for Social Security reform. The proposals do little to address Social Security’s looming insolvency. The accounts would be only temporary, expiring once the surplus was exhausted. A more comprehensive approach would still be needed. However, S1302 and GROW represent an important down payment on larger reforms to come. Full Text of Policy Analysis no. 550 (PDF, 134 KB)

                                                      So far, the White House has not publicly signaled a change in its stance, but with the changing political climate the White House may need the support of this group.  But even with White House support, the current prospects for this legislation look slim.

                                                        Posted by on Wednesday, September 14, 2005 at 02:07 AM in Economics, Social Security | Permalink  TrackBack (0)  Comments (12) 

                                                        Presidents Bush and Jintao Talk about U.S.-China Trade

                                                        President Hu Jintao of China agrees there are trade frictions between the U.S. and China in his meeting with president Bush on Tuesday and he promises to try and find ways to fix the problems:

                                                        Continue reading "Presidents Bush and Jintao Talk about U.S.-China Trade" »

                                                          Posted by on Wednesday, September 14, 2005 at 01:35 AM in China, Economics, International Trade | Permalink  TrackBack (0)  Comments (0) 

                                                          Good News from the Port of New Orleans

                                                          The Port of New Orleans is coming back ahead of schedule:

                                                          Port Comes Back Early, Surprisingly, by Keith L. Alexander and Neil Irwin, Washington Post:  The Port of New Orleans began unloading its first cargo ship ... months sooner than was predicted, a sign that disruption to the nation's shipping capacity may be less severe than originally forecast.

                                                          [One Update]

                                                          Continue reading "Good News from the Port of New Orleans" »

                                                            Posted by on Wednesday, September 14, 2005 at 01:17 AM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                                            Tuesday, September 13, 2005

                                                            And the Hours are Better Too...

                                                            Dear Mom:

                                                            I know you wanted me to be a doctor ever since I was a little boy, but take a look at this!

                                                            [From the WSJ:  "Wage Winners and Losers"]

                                                            Individual experience may vary.

                                                              Posted by on Tuesday, September 13, 2005 at 03:06 PM in Economics | Permalink  TrackBack (0)  Comments (13) 

                                                              CBOT Fed Watch: Chance of 25 bps Rate Hike is 82%

                                                              The chance of a 25 bps rate hike at the next FOMC meeting, according to the market's assessment at today's close, is 82%:

                                                              Continue reading "CBOT Fed Watch: Chance of 25 bps Rate Hike is 82%" »

                                                                Posted by on Tuesday, September 13, 2005 at 01:44 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0) 

                                                                Radio Economics: The Economic Impact of Katrina

                                                                Here's the blurb from the Radio Economics site:

                                                                Barry Ritholtz and Dr. Mark Thoma discuss the economic impact of Katrina. Topics discussed include the expected impact on inflation, interest rates, unemployment, Bush's tax cuts, the budget deficit and national debt, and whether the Fed will monetize the debt.

                                                                Barry, as always, is entertaining and insightful and it was fun to do this with him.  As for me, well...  Website (click on title for interview), MP3 file with interview.

                                                                  Posted by on Tuesday, September 13, 2005 at 12:33 PM in Economics | Permalink  TrackBack (0)  Comments (2) 

                                                                  Fed Watch: To Hike or Not – That is the Question

                                                                  Tim Duy's Fed Watch:

                                                                  The next FOMC meeting is just a week out, and market participants still lack a firm consensus on the path Greenspan & Co. will choose, but, as reported by David Altig, the tide has turned in favor of those who see another rate hike in the near future.  In a similar vein, this quote from Saturday’s Washington Post likely summarizes the Fed’s thinking at this point:

                                                                  If Federal Reserve policymakers had to vote today, they'd probably raise short-term interest rates a notch out of concern that Hurricane Katrina could harm the U.S. economy more by boosting inflation than by slowing growth.

                                                                  I would have to agree.  Recent Fedspeak and data give little reason to believe that the FOMC is ready to change course, despite Katrina.  While not discounting the real suffering of those affected by this disaster, Fed officials appear to be more worried about inflationary pressures rather than weak demand.

                                                                  The much awaited speech by Chicago Fed President Michael Moskow was decidedly hawkish (see Mark Thoma here). Perhaps more interesting was San Francisco Fed President Yellen’s speech, which was widely viewed as less hawkish than Moskow (see William Polley here). I tend to agree; Yellen appeared more cautious than her Chicago colleague.  But some little noted commentary places Yellen in a different light (I can’t take credit for spotting this; it was passed on to me by a contact).  Take a look at Yellen’s previous speech on July 29.  On that day Yellen thought:

                                                                  A final factor impacting the inflation outlook is the degree of slack in the labor market. Right now, the unemployment rate is relatively low: at 5 percent it’s near most estimates of the so-called natural rate. But other measures—such as the employment-population ratio, a survey of job market perceptions, and industrial capacity utilization—suggest that some slack still remains.

                                                                  Just a few weeks later, AFTER Hurricane Katrina, Yellen has a different view:

                                                                  As we assess the likely behavior of wage pressures going forward, we must also factor in the influence of slack in labor and product markets. The decline in the unemployment rate to 4.9 percent in August, coupled with some improvement in measures such as the employment-population ratio and industrial capacity utilization, suggest that while a "whisker" of slack may still remain, we probably can't count on slack to hold inflation down.

                                                                  Placing these paragraphs side by side, it appears that Yellen has reassessed the degree of slack remaining in the economy – and her conclusion is undeniably more hawkish.  Likewise, from July 29:

                                                                  Looking at the big picture elements—growth, employment, and inflation—I’d say things are in reasonably good shape. Over the past two years, the nation’s output growth has been pretty steady, averaging just over four percent; this is solidly above trend, which, by most estimates, is around three and a quarter to three and a half percent.

                                                                  Now, however:

                                                                  Beginning on the real side of the economy, the nation's output growth has averaged about three and one-half percent over the past year, a rate that is moderately above trend, which is now probably around three to three and a quarter percent.

                                                                  Yellen appears to have settled on the lower estimate of potential growth, possibly a result of slowing productivity growth.  Indeed, just a day earlier, we were greeted with news that second quarter productivity was revised downward and labor costs revised upward.  This shift in Yellen’s language is subtle but important as it again suggests Yellen sees less slack in the economy compared to just a few weeks ago.  So, in a nutshell, while Yellen may appear less hawkish than Moskow, she appears more hawkish than before Katrina, suggesting an increased willingness to stick with the current policy of “measured increases.”

                                                                  Monday we also heard from Dallas Fed President Richard Fisher in something of a surprise speech.  Everyone needs to take a look at this speech.  I expect many different opinions.  Simply put, Fisher is shaping up to be the most enigmatic Fed official in recent memory. Recall that Fisher first broke onto the scene with his famous proclamation that the Fed is in it “eighth inning” as far as rate hikes are concerned.  It soon became clear that the remainder of the FOMC did not share this view.  Now, according to Bloomberg:

                                                                  The Dallas Fed said as recently as Friday that Fisher would not be making any public appearances this week. Bank spokesman James Hoard said the speech was given at 1:30 p.m. local time in Austin, Texas, at a private event that wasn't open to the public or reporters.

                                                                  Turns out Fisher spoke quite a bit about the economy, and it became necessary to post his speech on the Dallas Fed website.  He sounds like he is ready to pause:

                                                                  When it comes to Katrina and the U.S. economy, my inclination is to read, listen and watch and not rush to judgment about how the disaster will impact the economy or how monetary policy ought to respond.

                                                                  This caution, however, does not stop him from listing a litany of reasons to expect little economic impact:

                                                                  You might recall that a powerful earthquake struck Kobe, Japan’s second largest port, in January 1995, causing $110 billion in damage to a city that handled 30 percent of the nation’s trade. In addition to killing 5,500 and leaving 300,000 homeless, the quake destroyed 75,000 buildings and damaged another 200,000. It took two years to rebuild. The impact on the Japanese GDP, however, wasn’t all that big.

                                                                  The hurricane’s damages, as we all know, were significant in absolute terms—estimated at up to $200 billion. We’ve all seen television footage of thousands of destroyed and damaged buildings. Up close, it looks overwhelming. But it is important to bear in mind that Katrina’s estimated physical losses amount to only a third of a percentage point of national wealth.

                                                                  Among the American economy’s strengths are its size, diversity, interconnections and resiliency. I fully expect the economy to rebound from this disaster—as it did after the Sept. 11, 2001, terrorist attacks. And the Northridge, California, earthquake in 1994. And Hurricane Andrew in Florida in 1992.

                                                                  And he is not sure what to think about inflation:

                                                                  It is clear, however, that a period of price volatility cannot be avoided for energy and other commodities processed, stored and transported along the Gulf Coast and the mighty Mississippi. The headlines have been full of news about gasoline climbing above $3 a gallon, although crude oil prices have already receded from their peaks. The massive effort to rebuild the Gulf Coast will create additional demand for lumber, steel, cement and other building materials. With so many prices in flux, our inflation measures will be tricky to read over the coming months.

                                                                  I find this somewhat remarkable.  Given that he clearly sees rising prices, how exactly are inflation measures tricky to read?  Interestingly, Fisher also has a message (threat?) for Congress and the President:

                                                                  While uncertainty surrounds Katrina’s effects on economic growth and core inflation, one thing is clear: Congress and the executive branch are acting swiftly to provide emergency funding for the affected areas. So far, the federal government has authorized more than $62 billion for recovery efforts. I have asked my staff to carefully monitor this spending. Obviously, the political authorities, not the Federal Reserve, have the power of the purse. I pray they act wisely. With the nation’s already large fiscal deficits, I personally believe it would be ill-advised for the Fed to monetize any fiscal profligacy.

                                                                  Fisher clearly does not want the Fed to accommodate fiscal deficits – it is almost as if he is saying that if the Fed continues to raise rates, Congress and the President have only themselves to blame.

                                                                  There are some other fun bits to Fisher’s speech, but I will leave additional parsing to others.  Here is my take on Fisher:  He is a dove, pure and simple.  He would stop raising rates yesterday if he could.  But he recognizes that he is a maverick voice on the FOMC, and consequently tries to stick to the party line, which would be, in my opinion, to downplay the impact on economic activity and play up the inflation story.  But his heart just is not in it. 

                                                                  The other key insight into Fed policy comes from the Beige Book, which last week reported that prior to Katrina, all districts except Boston saw increased economic activity, tightening labor markets, modest wage gains but rising benefit costs, and, possibly most importantly:

                                                                  Higher energy costs were reported by almost all Districts, and energy-intensive industries were able to pass some of these costs on to consumers in the Atlanta, Boston, Cleveland, Chicago, Kansas City, Minneapolis, Philadelphia, and San Francisco Districts.

                                                                  Granted, all of this is pre-Katrina.  But I imagine that anecdotal evidence collected today would have the tone of that in today’s Wall Street Journal article, “Manufacturers Gear Up After the Storm.”  Notably:

                                                                  But while rebuilding hurricane-ravaged regions will eventually mean more orders, it's also bringing more immediate supply glitches and rising prices, particularly for petroleum-based raw materials. Certain manufacturers are building inventory of steel, plastic resins and cardboard boxes and such stockpiling could eventually lead to even higher prices in the near term. The result is an uneven picture, as certain manufacturers gear up to produce more, while also facing negative cost and supply-related fallout from the storm.

                                                                  What an accurate description of the Fed’s conundrum.  While some demand pressures fell (at least temporarily – energy prices are pulling back from their highs) as a result of Katrina, others look poised to strengthen, all in the background of higher prices from a shock to the nation’s productive infrastructure. Sounds to me like the recipe for higher rates.

                                                                  Of course, there is time between now and next week for incoming data to sway the Fed.  But I suspect that data will have to be significantly out of line with expectations to steer the Fed from its current course.  Of course, I have trouble calling a rate hike a sure thing – simply too much uncertainty at this point.  As I see it, the mostly likely reason for a pause at this point is to take an opportunity to wait for more data.

                                                                  I think, however, that the Fed will find this a weak excuse to pause.  Fedspeak (at least 3 out of 4) so far has shown concern for tight labor markets and rising energy costs – a signal that FOMC members are looking to get ahead of price pressures.  So considering the way the Fed tends to look at the economy, and the possible inflationary pressures resulting from Katrina, the Fed is mostly likely poised to pull the trigger again next week, despite the devastation in the Gulf.

                                                                    Posted by on Tuesday, September 13, 2005 at 12:51 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (1)  Comments (13) 

                                                                    The Gap Inc. Abolishes Clicks

                                                                    No, not cliques.  Clicks.  As in mouse clicks.  Mouse-over optional pop-ups are used as a way to minimize online transactions costs:

                                                                    New Approach From Gap to Cut Down on Clicks, by Bob Tedeschi, NY Times: Are Gap Inc.'s new Web sites good enough to make up for the fact that the company turned away thousands of customers and millions of dollars in business while it got them up and running over the last two weeks? The answer appears to be yes, analysts said, thanks to a spate of promising innovations on Gap.com, BananaRepublic.com and OldNavy.com. In fact, the big question is how long it will take for competitors to catch up, and at what price.

                                                                    Continue reading "The Gap Inc. Abolishes Clicks" »

                                                                      Posted by on Tuesday, September 13, 2005 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (0) 

                                                                      DeMint and Ryan Hope to Revive Social Security Reform

                                                                      The GOP is not giving up on Social Security reform:

                                                                      DeMint to revisit Social Security, By Lauren Markoe, The State.com: U.S. Sen. Jim DeMint is behind a GOP plan to breathe life into the Social Security debate… Republican House leaders say they are ready to bring it to a vote as early as this month. However, the aftermath of Hurricane Katrina and the death of U.S. Supreme Court Chief Justice William Rehnquist could delay action on the issue and others before Congress. ... DeMint worked the phones this summer, calling congressional colleagues to make sure the idea didn’t lose steam. “... We’re planning on moving on this bill,” said U.S. Rep. Paul Ryan, R-Wis., a member of the House Ways and Means Committee. … Ryan is a sponsor of the House version of what he and DeMint call the “Stop the Raid” bill. ... “For me it’s good policy, but it also looks like good politics,” said DeMint, ... If it doesn’t pass there, DeMint reasons, it will at least expose members of Congress as unwilling to address Social Security. Democrats aren’t necessarily looking at such a vote as a potential source of embarrassment. “I would be proud to vote against that bill,” said U.S. Rep. Jim Clyburn, D-S.C...

                                                                      Until the White House signals it will get behind this bill, and so far that hasn't happened, I don’t see it going beyond the hopes of its sponsors, particularly in light of Hurricane Katrina’s aftermath.

                                                                        Posted by on Tuesday, September 13, 2005 at 12:15 AM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (1) 

                                                                        Monday, September 12, 2005

                                                                        Did the San Francisco Earthquake Cause The Panic of 1907?

                                                                        With so much interest in the economic effects of Hurricane Katrina, this forthcoming Journal of Economic History 64:4, December 2004 paper by Kerry Odell and Marc Weidenmier on the relationship between the San Francisco Earthquake in 1906, a subsequent severe but brief recession, and The Panic of 1907 might be of interest.  The Panic of 1907 was the last in a series of financial crises that helped to motivate the creation of the Fed.  The paper also contains references on the economics of natural disasters:

                                                                        Continue reading "Did the San Francisco Earthquake Cause The Panic of 1907?" »

                                                                          Posted by on Monday, September 12, 2005 at 02:16 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2) 

                                                                          Pollution Sparks Outrage and Riots in China

                                                                          Pollution is causing social unrest in China and severing ties between the countryside and party leaders (more on pollution in China here):

                                                                          China's Rising Tide of Protest Sweeping Up Party Officials, by Edward Cody, The Washington Post:  The first thing villagers noticed was the mud. Silt gradually thickened the waters of the Chaoshui River, they recalled, and before long fouled the rice paddies that provide them a meager but dependable living here in the rugged hills of central China. By the beginning of this year, the fish had disappeared and the once-pristine water turned black. Women could no longer do the family laundry along the banks. Then, as the weather warmed this spring, the villagers said, children started coming down with skin rashes after taking a dip. The reason their river was going bad … was that scores of mines containing an industrial metal known as molybdenum had started operating in the hills upstream...

                                                                          Continue reading "Pollution Sparks Outrage and Riots in China" »

                                                                            Posted by on Monday, September 12, 2005 at 10:44 AM in China, Economics, Environment, International Trade | Permalink  TrackBack (2)  Comments (8) 

                                                                            Pop Quiz!!!

                                                                            You are in charge of your nation’s fiscal policy giving you full control of both government expenditures and taxes. Due to past decisions, wars, recessions, and some very unfortunate disasters you find yourself with a large government debt. In response, you can

                                                                            1. cut taxes.
                                                                            2. cut spending.
                                                                            3. increase taxes.
                                                                            4. increase spending.
                                                                            5. hope the Fed monetizes the debt.
                                                                            6. put your head in the sand and do nothing.
                                                                            7. blame it on the other party.
                                                                            8. use Enron style accounting to hide the problem.
                                                                            9. hope the Bank of China catches fire and all those U.S. bonds burn up.

                                                                            Write down the letter(s) that best describe(s) your intended course of action.

                                                                              Posted by on Monday, September 12, 2005 at 02:43 AM in Budget Deficit, Economics | Permalink  TrackBack (1)  Comments (16) 

                                                                              The Size of Government over Time

                                                                              This graph shows the expenditure components of GDP, consumption, investment, government spending, and net exports, as a percentage of GDP:

                                                                              Expenditure Components as a Percentage of GDP

                                                                              [These data are from the last slide of a PowerPoint presentation for chapter 18 of Economics by McEachern at this site.  The textbook is not one I've used.]

                                                                              The graph in the textbook that is the source of these data presents this as though the yellow area is the government spending percentage and makes the point that the percentage of GDP arising from government expenditures declines slightly over time while the consumption percentage increases slightly over time.  But that's not quite correct, though the picture does not change much when this is accounted for.

                                                                              Continue reading "The Size of Government over Time" »

                                                                                Posted by on Monday, September 12, 2005 at 02:34 AM in Budget Deficit, Economics | Permalink  TrackBack (0)  Comments (6) 

                                                                                Freddie Mac Asks Lenders to Return Mortgage Payments to Katrina Victims

                                                                                What is happening in the mortgage market in New Orleans?  Will there be a large number of loan defaults?  Not initially:

                                                                                Freddie Mac offers temporary relief, CNN/Money:  Government housing agency Freddie Mac is suspending mortgage payments for borrowers affected by Hurricane Katrina and is planning to return some payments to cash-strapped storm victims. ...

                                                                                Continue reading "Freddie Mac Asks Lenders to Return Mortgage Payments to Katrina Victims" »

                                                                                  Posted by on Monday, September 12, 2005 at 01:35 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (1) 

                                                                                  Sunday, September 11, 2005

                                                                                  Where Your Money Doesn't Go

                                                                                  Spending on infrastructure as percentage of GDP:

                                                                                    Posted by on Sunday, September 11, 2005 at 05:22 AM in Economics | Permalink  TrackBack (0)  Comments (15) 

                                                                                    A Brief History of the U.S. Payments System

                                                                                    Anthony M. Santomero, President of the Philadelphia Fed, discusses the evolution of our payments system.  The history starts at a time in the U.S. when each bank issued its own checks and currency and banks are chartered and regulated by individual states rather than by the federal government.  He talks about some of the problems that arrangement causes for transactions, particularly over long distances, and how the federal government attempts to solve this by introducing a national currency and check clearing system.

                                                                                    Continue reading "A Brief History of the U.S. Payments System" »

                                                                                      Posted by on Sunday, September 11, 2005 at 02:34 AM in Environment, Financial System | Permalink  TrackBack (0)  Comments (0) 

                                                                                      How Fast are Debit and Credit Cards Replacing Checks?

                                                                                      Debit and credit cards are replacing paper checks.  It is estimated that in 2007 debit and credit card payments will both, individually, surpass checks in terms of total transactions.  Anthony M. Santomero, President of the Philadelphia Fed discusses the evolution of our payments system:

                                                                                      The Evolution of Payments in the U.S.: Paper vs. Electronic, by Anthony M. Santomero, President FRB Philadelphia:  The tide is turning in our nation’s payments system. ... hard evidence came last December ... electronic payments, for the first time ever, had trumped the paper check in terms of transactions. It appears our nation’s pattern of payments is finally evolving  ... from one based on paper checks to one based on electronics...

                                                                                      Continue reading "How Fast are Debit and Credit Cards Replacing Checks?" »

                                                                                        Posted by on Sunday, September 11, 2005 at 01:53 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (10) 


                                                                                        Even though Kintana is "one of the strangest mammals on the planet," he still hopes to be Cecil's friend.  He is very endangered:

                                                                                        (source, details here)

                                                                                          Posted by on Sunday, September 11, 2005 at 12:51 AM in Miscellaneous | Permalink  TrackBack (0)  Comments (1) 

                                                                                          Saturday, September 10, 2005

                                                                                          Recent Jobless Recoveries

                                                                                          If you are interested in why the last two recoveries have created fewer jobs than previous recoveries, this Federal Reserve Bank of Cleveland Economic Commentary examines this question.

                                                                                          Continue reading "Recent Jobless Recoveries" »

                                                                                            Posted by on Saturday, September 10, 2005 at 05:31 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (1) 

                                                                                            Insured Commercial Banks in the U.S. from 1934-2004

                                                                                            In answer to a question, this is the number of insured commercial banks from 1934-2004 (data source).  Though some of the decline is due to a large number of bank failures in the 1980s and early 1990s, the decline in commercial banks is driven largely by bank consolidation and merger activity arising from the breakdown of barriers to interstate banking in the 1980s:

                                                                                            Continue reading "Insured Commercial Banks in the U.S. from 1934-2004" »

                                                                                              Posted by on Saturday, September 10, 2005 at 02:07 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (4) 

                                                                                              Antitrust Suit Filed Against Realtor Group

                                                                                              The Justice Department filed an antitrust suit against the National Association of Realtors in an attempt to foster competition from online brokers.  I don’t know how big of a problem this is in this particular market, but it is nice to see Justice promoting competition.  Let’s hope this new found realization that a competitive marketplace is required for the virtues of the market to be realized extends to other areas:

                                                                                              Antitrust Lawyers Go After Realtors, by Kirstin Downey, Washington Post:  The Justice Department's antitrust division yesterday sued the National Association of Realtors, alleging that the powerful trade group is using its online multiple listing service policies to restrict competition from discount brokers offering lower prices…

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                                                                                                Posted by on Saturday, September 10, 2005 at 09:27 AM in Economics, Housing, Market Failure | Permalink  TrackBack (0)  Comments (7) 

                                                                                                Governors Object to Administration's Forest Policy

                                                                                                If you've never seen the old growth forests of the Pacific Northwest, I hope you get to someday, before it's too late:

                                                                                                A Light in the Forests, editorial, NY Times:  The Bush administration has largely succeeded in its systematic effort to roll back environmental protections for America's national forests. It has weakened agreements to protect old-growth trees in the Pacific Northwest, persuaded Congress to adopt an industry-friendly plan for fire suppression and overhauled rules governing forest management in ways that erode safeguards not only for the forests but also for the endangered species that live there.

                                                                                                Continue reading "Governors Object to Administration's Forest Policy" »

                                                                                                  Posted by on Saturday, September 10, 2005 at 08:46 AM in Economics, Environment, Oregon | Permalink  TrackBack (0)  Comments (15) 

                                                                                                  And If You Believe That...

                                                                                                  Treasury Secretary John Snow says spending will be higher in 2006 due to Hurricane Katrina, House Majority Leader Tom DeLay says taxes will be cut, and the claim is the deficit will fall.  Even allowing for fuzzy math, something does not add up:

                                                                                                  Snow sees US cutting budget gap despite hurricane, Reuters:  The White House can reach its goal of cutting the U.S. budget deficit despite rising costs of rebuilding areas of the Gulf Coast crushed by Hurricane Katrina, Cabinet officials said on Friday as they toured the region. "While this will elevate spending levels for '06 ... we're going to stay on track with the president's deficit-reduction program," U.S. Treasury Secretary John Snow told reporters in Houston ... "You can't attack the economy by taxing the people that are in this tent providing jobs," DeLay, a Texas Republican, told reporters ... "If you raise the taxes on these people, you might not have the jobs to provide, so the tax cuts are incredibly important," DeLay said.

                                                                                                    Posted by on Saturday, September 10, 2005 at 02:34 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (4) 

                                                                                                    Expanding HUD to Help the Poor

                                                                                                    Alex Tabarrok at Marginal Revolution sent me this proposal to bring to your attention:

                                                                                                    Housing the Poorest Hurricane Victims, Marginal Revolution: Ed Olsen at the University of Virginia, one of the country's leading researchers on housing, sent me the following proposal to immediately expand HUD's Section 8 Housing Choice Voucher Program.  It's a brilliant proposal that needs attention at the highest levels of government.  Pass it on.

                                                                                                    HOUSING THE POOREST HURRICANE VICTIMS By Edgar O. Olsen What the people displaced by Hurricane Katrina need most now is housing.

                                                                                                    Continue reading "Expanding HUD to Help the Poor" »

                                                                                                      Posted by on Saturday, September 10, 2005 at 01:35 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (1)